Chapter 20 – Corporations in Financial Difficulty
P20-7 Chapter 7 Liquidation, Statement of Affairs
a. Name Brand Company
Statement of Affairs
July 31, 20X1
Assets
Estimated
Amount
Available
Estimated
Estimated
to
Gain
Book
Current
Unsecured
(Loss) on
Value
Values
Claims
Realization
(1)
Assets pledged with fully secured
creditors:
$ 50,000
Accounts receivable (net)
$ 50,000
Less: 12% note payable and
interest
(44,000)
$ 6,000
80,000
Land
$110,000
$ 30,000
162,000
Plant and equipment (net)
150,000
(12,000)
$260,000
Less: Mortgages payable
and interest
(234,600)
25,400
(2)
Assets pledged with partially
secured creditors:
30,000
Marketable securities
$ 22,000
(8,000)
Less: 10% note payable
and interest
(29,400)
79,000
Inventory
$ 75,000
(4,000)
Less: Accounts payable
(105,000)
(3)
Free assets:
5,000
Cash
$ 5,000
5,000
55,000
Accounts receivable (net)
55,000
55,000
81,000
Inventory
76,000
76,000
(5,000)
7,000
Prepaid insurance
1,500
1,500
(5,500)
250,000
Plant and equipment (net)
190,000
190,000
(60,000)
72,000
Franchises
30,000
30,000
(42,000)
$388,900
(45,000)
$343,900
82,500
$871,000
$(106,500)
$426,400
P20-7 (continued)
Equities
Estimated
Book
Amount
Value
Unsecured
(1)
Fully secured creditors:
$ 44,000
12% note payable and interest
$ 44,000
234,600
Mortgages payable and interest
234,600
$278,600
(2)
Partially secured creditors:
29,400
10% note payable and interest
$ 29,400
Less: Marketable securities
(22,000)
$ 7,400
105,000
Accounts payable
$105,000
Less: Inventory
(75,000)
30,000
(3)
Creditors with priority:
-0-
Estimated liquidation expenses
$ 13,000
20,000
Wages payable
20,000
12,000
Taxes payable
12,000
$ 45,000
(4)
Unsecured creditors:
160,000
Accounts payable
160,000
212,000
Notes payable
212,000
17,000
Interest payable
17,000
(5)
Stockholders’ equity:
240,000
Common stock
(203,000)
Retained earnings (deficit)
$871,000
$426,400
b.
Percentage to unsecured creditors:
$343,900
= 80.65%
$426,400
P20-8 Chapter 7 Liquidation, Statement of Affairs [AICPA Adapted]
a.
Tower, Inc.
Statement of Affairs
December 31, 20X1
Assets
Estimated
Amount
Estimated
Estimated
Available to
Gain
Book
Current
Unsecured
(Loss) on
Value
Values
Claims
Realization
(1)
Assets pledged with fully secured
creditors:
$ 40,000
Accounts receivable
$ 40,000
13,000
Land
25,000
$ 12,000
90,000
Building (net)
110,000
20,000
140,000
Machinery (net)
75,000
(65,000)
$250,000
Less: Fully secured claims
from liability side:
Note payable-bank
$ 30,000
Mortgage payable and
related interest
132,400
(162,400)
$ 87,600
(2)
Assets pledged with partially
secured creditors:
20,200
Marketable securities
$ 19,000
Accrued interest
200
$ 19,200
(1,000)
Less: Notes payable (to bank)
(20,000)
(3)
Free assets:
1,500
Cash
$ 1,500
1,500
35,000
Accounts receivable (after
reclassifying $5,000 of credit
balances to accounts payable)
35,000
35,000
60,000
Finished goods
50,000
50,000
(10,000)
40,000
Raw materials (net of $10,000
of conversion costs)
60,000
60,000
20,000
5,000
Prepaid expenses
-0-
(5,000)
Estimated amount available for unsecured
creditors, including creditors with priority
$234,100
Less: Liabilities with priority
(41,500)
Estimated amount available for unsecured creditors
$192,600
Estimated deficiency to unsecured
creditors (plug)
18,200
$444,700
$(29,000)
Total unsecured debt
$210,800
P20-8 (continued)
Book
Amount
Value
Liabilities and Stockholders’ Equity
Unsecured
(1)
Fully secured creditors:
$ 30,000
Notes payable– bank
$ 30,000
132,400
Mortgage payable and interest
132,400
Total (deducted on asset side)
$162,400
(2)
Partially secured creditors:
20,000
Notes payable–bank
$ 20,000
Less: Pledged marketable
securities and interest
(from asset side)
(19,200)
$ 800
(3)
Liabilities with priority:
Estimated liquidation expenses
$ 11,000
15,000
Wages payable
15,000
15,500
Payroll taxes payable
15,500
Total (deducted on asset side)
$ 41,500
(4)
Unsecured creditors:
70,000
Accounts payable (after excluding $15,000
of payroll taxes payable and including
$5,000 of credit balances reclassified
from accounts receivable)
70,000
85,000
Notes payable
85,000
5,000
Audit fee of prior year
5,000
50,000
Contingent liability on damage suit
50,000
21,800
(5)
Stockholders’ equity, after giving effect
to unrecorded items that are properly
bookable as of December 31, 20X1*
($100,000 – $20,000 – $500 + $200
– $500 – $2,400 – $5,000 – $50,000)
$444,700
Total unsecured debt
$210,800
* Common stock, $100,000; retained earnings deficit, ($20,000); cash expended for
travel, ($500); accrued interest receivable, $200; unrecorded employer’s payroll
taxes, ($500); unrecorded interest on mortgage, ($2,400); bill for last year’s audit,
($5,000); and probable damage suit judgment, ($50,000).
b.
Estimated settlement per dollar of unsecured liabilities:
Estimated amount available for
unsecured creditors
$192,600
= $0.914
Total unsecured debt
$210,800
P20-9 Financial Statements for a Firm in Chapter 11 Proceedings
a.
Income statement for a company in reorganization proceedings:
Hobbes Company
(Debtor-in-Possession)
Income Statement
For the Year December 31, 20X2
Revenue:
Sales
$246,000
Cost and Expenses:
Cost of Goods Sold
170,000
Selling, Operating, and Administrative
50,000
Interest (contractual interest $51,000)
4,000
$224,000
Earnings before Reorganization Items and
Income Taxes
$ 22,000
Reorganization Items:
Professional Fees
$(15,000)
Interest Earned on Accumulated Cash
Resulting from Chapter 11 Proceeding
3,000
Total Reorganization Items
(12,000)
Income before Income Tax and
Discontinued Operations
$ 10,000
Income Tax
(5,000)
Income before Discontinued Operations
$ 5,000
Discontinued Operations:
Operating Loss, Net-of–Tax
$(16,000)
Gain on Sale of Assets, Net-of–Tax
9,000
Net Discontinued Operations
(7,000)
Net Loss
$ (2,000)
P20-9 (continued)
b.
Statement of cash flows for a company in reorganization proceedings:
Hobbes Company
(Debtor-in-Possession)
Statement of Cash Flows
For the Year December 31, 20X2
Cash Flows from Operating Activities:
Cash Received from Customers
$ 264,000
Cash Paid to Suppliers and Employees
(206,000)
Interest Paid
(4,000)
Net Cash Provided by Continuing Operating
Activities before Reorganization Items
$ 54,000
Operating Cash Flows from Reorganization Activities:
Professional Fees
$ (15,000)
Interest Received on Cash Accumulated Because
of Chapter 11 Proceeding
3,000
Net Cash Used by Reorganization Items
$ (12,000)
Operating Cash Flows from Discontinued Operations:
Net Cash Used by Discontinued Operations
$ (3,000)
Net Cash Provided by Operating Activities
$ 39,000
Cash Flows Provided by Investing Activities:
Proceeds from Sale of Assets Due to
Chapter 11 Proceeding
$ 18,000
Net Cash Provided by Investing Activities
$ 18,000
Cash Flows Provided by Financing Activities:
Net Borrowings under Short-Term Financing Plan
$ 10,000
Principal Payments on Pre-petition Debt
Authorized by Court (Bonds Payable)
(10,000)
Net Cash Provided by Financing Activities
$
-0-
Net Increase in Cash
$
57,000
Cash at January 1, 20X2
15,000
Cash at December 31, 20X2
$
72,000
P20-9 (continued)
c.
Balance sheet for a company in reorganization proceedings:
Hobbes Company
(Debtor-in-Possession)
Balance Sheet
December 31, 20X2
Assets
Cash
$ 72,000
Accounts Receivable (net)
47,000
Inventory
88,000
Total Current Assets
$207,000
Property, Plant, and Equipment (net)
460,000
Total Assets
$667,000
Liabilities
Liabilities Not Subject to Compromise:
Current Liabilities (post-petition):
Short-Term Borrowings
$ 10,000
Accounts Payable – Trade
7,000
Total Liabilities Not Subject to Compromise
$ 17,000
Liabilities Subject to Compromise (pre-petition):
Accounts Payable
$ 138,000
Notes Payable, 10%
170,000
Bonds Payable, 12%
240,000*
Accrued Interest Payable
47,000
Total Liabilities Subject to Compromise
595,000
Total Liabilities
$612,000
Shareholders’ Equity
Preferred Stock
$ 50,000
Common Stock ($1 par)
50,000
Additional Paid-In Capital
75,000
Retained Earnings (Deficit)
(120,000)
Total Shareholders‘ Equity
$ 55,000
Total Liabilities and Shareholders’ Equity
$667,000
* $10,000 payment approved by the Court, reducing pre-petition bonds payable from
$250,000 to $240,000.